Understanding Tennessee's State Tax System

## No State Income Tax One of the most notable aspects of Tennessee's tax system is the absence of a state income tax. This means residents do not pay taxes on their wages or salaries, making Tennessee one of only [eight states](https://tax.ohio.gov/) that don't collect income tax. The Hall Income Tax, which previously taxed interest and dividend income, was fully repealed as of January 1, 2021, further solidifying Tennessee's position as a tax-friendly state. ## Sales Tax Structure Tennessee compensates for the lack of income tax with one of the highest sales tax rates in the nation. The state sales tax rate is **7%**, but local jurisdictions can add their own sales taxes, leading to combined rates that can reach **9.75%** in some areas. ### Local Sales Tax Limitations * Maximum local rate cannot exceed 2.75% * Combined state and local rates cannot exceed 9.75% * Local rates must be approved by voter referendum ### Sales Tax on Groceries Tennessee imposes a reduced sales tax rate of **4%** on groceries, with local taxes potentially adding to this rate. This affects the overall cost of living for residents. ## Property Taxes Property taxes in Tennessee are relatively low compared to the national average. The state does not levy a property tax; instead, taxes are assessed and collected at the local level. The average effective property tax rate is approximately **0.64%**. > Property is assessed at different percentages of its value based on its classification. Residential property is assessed at 25% of its value, while commercial property is assessed at 40%. ### Property Tax Relief Programs * Elderly Homeowner Program * Disabled Homeowner Program * Disabled Veteran Program * Tax Freeze Program for seniors ## Business Taxes Tennessee imposes several taxes on businesses: 1. **Franchise Tax**: 0.25% of the greater of net worth or real/tangible property (minimum tax of $100) 2. **Excise Tax**: 6.5% of net earnings from business conducted in Tennessee 3. **Business Tax**: Graduated tax based on classification and gross receipts (0.02% to 0.3%) ## Special Taxes and Fees ### Fuel Taxes * Gasoline: $0.26 per gallon * Diesel: $0.27 per gallon * Additional fees may apply for environmental and inspection purposes ### Sin Taxes * Cigarette tax: $0.62 per pack * Mixed drink tax: 15% * Beer tax: $1.29 per barrel ## Impact on Residents ### Advantages * No state income tax on wages * Lower overall tax burden for high-income earners * Relatively low property taxes compared to national averages ### Disadvantages * Higher sales tax burden affects lower-income residents disproportionately * Limited public services due to reduced tax revenue * Higher costs for basic necessities due to sales tax --- For more detailed information about specific tax rates and regulations, visit the [Tennessee Department of Revenue](https://www.tn.gov/revenue.html) website.

Understanding Tennessee's State Tax System

Related articles